Insight: Fearing China, South Korea targets contractors on Taiwan navy submarines

CSBC, TAIWAN

16/10/2023 02:00

By Ju-min Park
       SEOUL, Oct 16 (Reuters) - South Korean authorities cited
the risk of Chinese economic retaliation when they charged
marine technology firm SI Innotec last year with violating trade
laws for its work on Taiwan's new military submarine program,
according to a police document seen by Reuters and two people
familiar with the matter.
    In a Feb. 17, 2022 affidavit to a judge seeking the arrest
of SI Innotec executive director Park Mal-sik, police said
authorities feared a repeat of the sweeping sanctions imposed by
Beijing in 2016, after Seoul decided to install THAAD, a U.S.
anti-missile system. China agreed to lift those measures in late
2017.
    The affidavit said SI Innotec's deal to supply Taiwan with
submarine manufacturing equipment "directly impacts the overall
security of South Korea" and police, who had consulted with the
country's arms sales regulator, were "concerned about a crisis
similar to a second THAAD deployment, such as economic
retaliation".
    The Defense Acquisition Program Administration
(DAPA)regulator had told an unidentified subcontractor that the
government had "export concerns" regarding Taiwan, and "takes a
very cautious stance" on such approvals, the affidavit said.
        The judge ordered Park's arrest on Feb. 28 on grounds
that he posed a flight risk and might destroy evidence,
according to a person familiar with the matter.
    In the sealed affidavit reviewed by Reuters, police cited
China's furious reaction in a 2021 Reuters report about defence
contractors and experts from South Korea and six other countries
working on Taiwan's submarine program.
    SI Innotec, which was fined in August 2022, and Park, who
received a suspended prison sentence, deny wrongdoing and have
appealed. Through a company lawyer, Park declined comment.
    In a sign of a broader crackdown, two other South Korean
companies that allegedly supplied Taiwan were also charged in
November with breaking trade laws, and one of their chief
executives was accused of industrial espionage, according to
court records and four people familiar with the matter.
    The identities of defence engineering subcontractors Keumha
Naval Technology (KHNT) and S2&K, and the charges facing the
co-defendants in their closed-door trial, have not been
previously reported. Reuters could not determine if geopolitical
tensions were discussed in those ongoing proceedings.
    A KHNT official, speaking on condition of anonymity because
he was not authorised to talk to media, confirmed an ongoing
criminal case. The company declined further comment. S2&K had no
comment.
    Amid rising military tensions with China, Taiwan unveiled
its first homegrown submarine on Sept. 28 in the southern port
city of Kaohsiung. The vessel will soon enter sea trials.
    The SI Innotec affidavit and interviews with seven people
with military, shipbuilding and legal ties show how political
considerations about an economic rupture with China, Seoul's
largest trading partner, have weighed on South Korea's
investigations into the three companies. The people spoke on
condition of anonymity to discuss ongoing legal proceedings with
national security implications.  
    Seoul's foreign ministry was "completely against" KHNT's
work with Taiwan and signalled its disapproval to DAPA,
according to a person familiar with the subcontractor.
    The affidavit said many firms with submarine expertise
avoided helping Taiwan because they did not expect government
approval given the risk of "bigger damage to (the) economy than
benefits", including a possible Chinese ban on South Korean
exports.
    Police declined to comment, citing national security
concerns. The prosecutors' office that charged the three
subcontractors declined to comment on ongoing legal proceedings.
Reuters attempted to reach then-president Moon Jae-in through
the office of a former aide. The office referred questions to
the foreign ministry.
    The foreign ministry said it was aware the trials were
underway and referred detailed questions to DAPA. DAPA said it
follows the law when making decisions on exports, but had no
further comment.
    A police investigator, who spoke on condition of anonymity
to discuss ongoing legal matters, said that there was no
pressure from Moon's liberal government, which left office in
May 2022, to get tough on SI Innotec.
    Reuters could not determine whether Beijing pressured Seoul
to clamp down on the companies. 
    Asked by Reuters for comment, a Chinese Foreign Ministry
spokesperson accused Taiwan's ruling Democratic Progressive
Party of "colluding with external forces". The spokesperson did
not address a question on whether Beijing pressed Seoul about
the subcontractors.
    Beijing told Reuters in 2021 that countries involved in
Taiwan's project were "playing with fire".
    Taiwan's foreign and defence ministries had no comment.
    Seoul has no formal diplomatic ties with Taipei and has
avoided arming the democratically ruled island over which China
claims sovereignty, even as its companies ink weapons deals with
other Asian neighbours.
     
    FOREIGN EXPERTISE
    Taiwan President Tsai Ing-wen initiated the Indigenous
Defense Submarine program in 2016.
    The new vessels, which complement two delivered by the
Netherlands in the 1980s, are a "strategic deterrent" that make
it more challenging for China to project naval power in the
Pacific, the Taiwanese admiral leading the project told an
internal briefing in September.
    Many military experts say that an expanded Taiwanese
submarine fleet could complicate a potential invasion by
Beijing. U.S. officials, however, warn that such assets should
not come at the expense of smaller weapons that would help
Taiwan wage "asymmetrical warfare" against China's far-larger
arsenal. 
    Taiwan drew on the expertise of retired South Korean naval
officers - including managers at SI Innotec and KHNT - who are
not required by defence ministry regulations to seek permission
before working overseas.
    SI Innotec is accused of violating the Foreign Trade Act,
which requires DAPA's approval to transfer abroad many
"strategic goods" for military use.
    The regulator is also tasked with promoting exports, a role
that requires officials to make hard decisions on otherwise
profitable deals that might irk China, said four people familiar
with the criminal cases.
    In 2019, SI Innotec agreed a deal with Taiwanese shipbuilder
CSBC to supply and install $12 million in welding and assembly
equipment for submarine pressure hull manufacturing, according
to contracts presented at trial. 
    The equipment was not designed solely for military purposes
and did not involve sensitive technology, SI Innotec told
Reuters.
    SI Innotec said the contract, at CSBC's request, listed the
equipment's primary use as for wind power generation. It told
Reuters it is "customary" for dual-use equipment contracts to be
"signed for industrial use, not exposing military use" and
Taiwanese clients are discreet about defence work. 
        CSBC, which leads construction for the submarines, has
an offshore wind power business. It declined to comment on its
contracts.
    In April 2020, DAPA suggested SI Innotec check with it
whether the equipment could be categorized as military goods and
require export approval, according to court documents.
    In response to Reuters questions, the subcontractor said it
told DAPA it was exporting dual-use goods, which can undergo a
self-certification process that the regulator does not oversee.
The results of that self certification showed export approval
was not needed and DAPA was informed, SI Innotec said. 
    In August 2022, the Changwon District Court fined SI Innotec
14 billion won ($10.42 million).
    "The accused were fully aware that the subject equipment
would be used to manufacture a military submarine", the court
ruled.
    SI Innotec said police designated its equipment as military
goods after a "subjective and opaque" consultation with DAPA
reliant on "limited data". It said it had "strong doubts" about
whether its exports would be considered military grade if they
had not been sent to Taiwan.
    SI Innotec CEO Park Moo-sik — who was not personally charged
— continues to work in Taiwan on the project, said two people
familiar with his movements. He declined comment through a
company lawyer. 
     
    QUESTION OF PERMISSION
    KHNT and its chief executive, retired naval officer Yang
Hyang-kweon, are alleged to have illicitly transferred a
submarine component to Taiwan, said two people familiar with the
subcontractor's agreement.
    Yang - who did not respond to requests for comment - was
detained last year and released on bail in March, court records
show.
    The component was related to a torpedo launching tube,
according to two people familiar with KHNT's work. KHNT's
co-defendant, S2&K, specializes in such systems.
    KHNT initially went through DAPA's process, according to
three people familiar with the matter. But it received no
response when it wanted to send detailed designs and went ahead
to meet a deadline, two of the people said.
    It was at this point that Seoul's foreign ministry told DAPA
it disapproved of the deal, one of them said. 
    "There are many things that South Korea can help Taiwan with
but can't in reality", said defence diplomacy researcher Cho
Hyeon Gyu, who served as military attache in Taipei and Beijing.
Relations with China and the difficulty of secretly supporting
Taiwan severely narrowed Seoul's ability to help, he added.
    ($1 = 1,343.1000 won)

 (Reporting by Ju-min Park; Additional reporting by Ben
Blanchard and Faith Hung in Taipei, and Yew Lun Tian in Beijing;
Editing by Katerina Ang and Josh Smith)
 ((mailto:ju-min.park@thomsonreuters.com; Reuters Messaging:
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